Mr. Anthony Makuch reports
KIRKLAND LAKE GOLD REPORTS STRONG FULL-YEAR AND Q4 2017 EARNINGS AND CASH FLOW
Kirkland Lake Gold Ltd. has released its financial and operating results for the full year and fourth quarter of 2017. The company's full financial statements and management discussion and analysis are available on SEDAR and on the company's website. All dollar amounts in this news release are expressed in U.S. dollars, unless otherwise noted.
Key highlights of the 2017 results include:
Record production: 596,405 ounces produced in 2017, 90-per-cent increase from 2016 and better than improved guidance of 580,000 to 595,000 ounces;Improved unit costs: operating cash cost averaging $481/ounce sold, achieved improved guidance of $475 to $500 and 16 per cent better than 2016; all-in sustaining costs (AISC) averaging $812/ounce sold, in line with improved guidance of $800 to $825 and 13-per-cent improvement from 2016 (total production costs in 2017 totalling $288.3-million compared with $192.8-million in 2016 due to higher business volumes);Strong free cash flow: cash flow from operating activities in 2017 totalling $309.8-million, 66-per-cent increase from 2016, while free cash flowtotalled $178.0-million, 56 per cent higher than previous year;Solid earnings performance: 2017 net earnings totalling $132.4-million (64 cents per basic share) versus $42.1-million (35 cents per basic share) in 2016; net earnings in 2017 consisting of earnings from continuing operations of $157.3-million (76 cents per basic share) including a loss from discontinued operations of $24.9-million (12 cents per basic share) related to the 2017 care and maintenance expenses and sale of the company's Stawell mine on Dec. 21, 2017;Adjusted net earnings from continuing operations in 2017 totalling $149.1-million (72 cents per share), a 120-per-cent increase from 2016; the exclusion from adjusted net earnings from continuing operations in 2017 of the loss from discontinued operations of $24.9-million (12 cents per share) as well as a net deferred tax recovery of $10.0-million (five cents per basic share) were the main differences between net earnings and adjusted net earnings from continuing operations;Significant exploration success: drilling extending high-grade zones at Fosterville, Macassa and Cosmo and intersects new areas of gold mineralization at Taylor (total exploration and evaluation expenditures of $48.4-million in 2017 versus $15.8-million the prior year);Solid financial position: cash at Dec. 31, 2017, totalling $231.6-million with no debt following repayment or conversion at maturity of two series of convertible debentures ($44.0-million paid in cash, 4,505,393 common shares issued on conversion of 7.5 per cent debentures);Share repurchases: 5.4 million common shares repurchased for $60.1-million ($76.5-million (Canadian)) through a normal course issuer bid (NCIB) initiated in May, 2017;Dividend: quarterly dividend introduced with first payment of one cent per share in July, 2017 (dividend increased to two cents per share effective Jan. 15, 2018, payment).
Key highlights of fourth quarter 2017 results include:
Record quarterly production: fourth quarter 2017 production totalling 166,579 ounces, 56-per-cent increase from the fourth quarter of 2016 and 20 per cent higher than the third quarter of 2017;Low unit costs: operating cash costs per ounces sold in the fourth quarter of 2017 averaged $412, 23-per-cent improvement from $533 in the fourth quarter of 2016 and 15 per cent better than $482 the previous quarter; AISC per ounce sold averaged $816, 9 per cent better than $900 in the fourth quarter of 2016 and a 3-per-cent improvement from $845 in the third quarter of 2017 (total production costs of $68.3-million compared with production costs of $60.5-million in the fourth quarter of 2016 and $66.5-million in the third quarter of 2017);Solid cash flow generation: cash flow from operating activities of continuing operations totalling $103.4-million compared with $68.5-million in the fourth quarter of 2016 and $66.8-million in the third quarter of 2017; free cash flow in the fourth quarter of 2017 totalling $64.5-million, 42 per cent and 105 per cent higher than $45.3-million in the fourth quarter of 2016 and $31.5-million in the third quarter of 2017, respectively;Solid earnings growth: net earnings in the fourth quarter of 2017 totalling $41.0-million (20 cents per basic share), which compared with net earnings of $3.1-million (two cents per basic share) in the fourth quarter of 2016 and $43.8-million (21 cents per basic share) the previous quarter;included in net earnings for the fourth quarter of 2017 earnings from continuing operations totalling $65.9-million (32 cents per basic share) and a loss from discontinued operations of $24.9-million (12 cents per basic share) related to the 2017 care and maintenance and sale of the company's Stawell mine on Dec. 21, 2017;Adjusted net earnings from continuing operations in the fourth quarter of 2017 totalling $71.2-million (34 cents per share) versus $22.8-million (16 cents per share) in the fourth quarter of 2016 and $27.4-million (14 cents per share) in the third quarter of 2017; adjusted net earnings from continuing operations in the fourth quarter of 2017 excluding the $24.9-million loss on discontinued operations (12 cents per share), a $17.6-million pretax mark-to-market loss on fair valuing the company's 14.0 million common share purchase warrants in Novo Resources Corp.(eight cents per share) and the $10.0-million (five cents per share) net deferred tax recovery;Continued exploration success: exploration and evaluation expenditures in the fourth quarter of 2017 totalling $10.7-million compared with $6.0-million in the fourth quarter of 2016 and $16.9-million the previous quarter; key drill results released during the quarter including a 120-metre down-plunge extension of the Swan zone at the Fosterville mine, a significant expansion of the Lantern deposit at the Cosmo mine in the Northern Territory of Australia and the intersection of a new gold zone 350 metres below the west porphyry deposit at the Taylor mine;Share repurchases: a total of 1,553,500 common shares repurchased for $20.7-million ($26.3-million (Canadian)) through the NCIB;Dividend payment: the company's second quarterly dividend of $1.7-million or one Canadian cent per share made on Oct. 16, 2017.
2017 mineral reserve and mineral resource update
On Feb. 20, 2018, the company released mineral reserve and mineral resource estimates for Dec. 31, 2017 (see news release dated Feb. 20, 2018). Included in the results, were an increase in mineral reserves at Fosterville to 1.7 million ounces at an average grade of 23.1 grams per tonne, with the mineral reserve estimate for the Swan zone more than doubling from the June 30, 2017, midyear estimate to 1.16 millionounces at an average grade of 61.2 grams per tonne. In addition to mineral reserves, mineral resources at Fosterville at Dec. 31, 2017, included measured and indicated mineral resources of 2.15 million ounces at an average grade of 4.8 grams per tonne (exclusive of mineral reserves) and inferred mineral resources of 1.9 millionounces at an average grade of 7.1 grams per tonne. Based on the significant growth in depreciable mineral reserves and mineral resources at Fosterville, the company expects a reduction in depreciation and depletion expenses related to the Fosterville mine in 2018.
At Macassa, after identifying a significant eastern extension of the south mine complex (SMC) in mid-2017, the company focused drilling activities on establishing mineral resources in this new area. Significant success was achieved growing mineral resources in 2017, with measured and indicated mineral resources increasing 58 per cent, to 2.09 million ounces at an average grade of 17.1 grams per tonne, and inferred mineral resources increasing 48 per cent, to 1.37 millionounces at an average grade of 22.2 grams per tonne. The increase in mineral resources highlights the potential that exists for future growth in mineral reserves at the Macassa mine.Total mineral reserves at Macassa at Dec. 31, 2017, totalled 2.03 million ounces at an average grade of 21.0 grams per tonne.
Tony Makuch, president and chief executive officer of Kirkland Lake Gold, commented: "In 2017, Kirkland Lake Gold performed extremely well against our three key pillars of value creation: operational excellence, disciplined organic growth and a focus on shareholder returns. Operationally, we improved our guidance multiple times and still beat our target range for production and were well within the improved guidance for operating cash cost and AISC per ounce sold.We also clearly demonstrated an ability to generate cash flow, with free cash flow for the year totalling $178.0-million. In terms of organic growth, we increased production by 90 per cent in 2017, 10 per cent on a pro forma basis, even after placing three mines on care and maintenance. We also set the stage for continued year-over-year production growth, with our longer-term goal being to reach a million ounces of annual production from existing mines within five to seven years. In terms of shareholder returns, we were the top performing stock on the S&P/TSX Composite Index on a full-year basis in 2017. We also took steps to support increased shareholder value, including buying back 5.4 million shares, introducing a quarterly dividend and making strategic investments with future value potential.
"Looking at the fourth quarter of 2017, we achieved record production and generated strong earnings and free cash flow. Leading the way was Fosterville, where fourth quarter2017 production totalled 79,157 ounces, operating cash costs were $226 per ounce sold, and AISC averaged $471 per ounce sold. We also achieved strong results from our Canadian operations, with both Taylor and Holt achieving record quarterly production and Macassa recording its second-best quarter ever. Free cash flow for the quarter was $64.5-million, more than double the level of the previous quarter.
"Turning to exploration, we finished the year with very encouraging exploration results during the fourth quarter of 2017, including announcing major extensions of the Swan zone at Fosterville and Lantern deposit at the Cosmo mine, as well as intersecting a new zone of gold mineralization 350 metres below the Taylor mine. The exploration success we achieved in 2017 was a testament to the growth potential of our existing operations, and is the key reason that we have been able to announce a 36-per-cent increase in consolidated mineral reserves from Dec. 31, 2016, including a 247-per-cent increase at Fosterville, where the mineral reserve now totals 1.7 million ounces at an average grade of 23.1 grams per tonne. Equally encouraging, our base of mineral resources has also shown strong growth, with Macassa's measured and indicated mineral resources increasing 58 per cent and the mine's inferred mineral resources growing 48 per cent, something that bode well for future growth in mineral reserves."
Review of financial and operating performance
The following discussion provides key summarized consolidated financial and operating information for the three months and year ended Dec. 31, 2017. For the three months and year ended Dec. 31, 2017, the information includes the consolidated financial and operating information for the company's Canadian and Australian operations. The financial and operating information for the three months and year ended Dec. 31, 2016, includes the Australian operations from Nov. 30, 2016, following the completion of the Newmarket arrangement on Nov. 30, 2016. In addition, information for the year ended Dec. 31, 2016, includes the St. Andrew assets from Jan. 26, 2016, the date the St. Andrew arrangement was completed. In addition, results for 2016 and the fourth quarter of 2016 have been restated to exclude discontinued operations, related to the sale of Stawell mine.
FINANCIAL HIGHLIGHTS(in thousands of dollars, except per-share amounts) Three months ended Year endedDec. 31, 2017Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2016Revenue$212,364 $130,901$747,495$403,340Production costs 68,283 60,625 288,315 192,842Earnings before income taxes 54,799 17,698 196,07979,767(Loss) from discontinued operations (24,904)(4,627)(24,904) (4,627)Net earnings 40,9803,076 132,42642,107Basic earnings per sharefrom continuing operations 0.32 0.050.760.39Basic earnings per share 0.20 0.020.640.35Diluted earnings per share 0.20 0.020.630.34Cash flow from operations 103,351 68,456 309,812 186,981Cash investment on minedevelopment and PPE38,832 23,111 131,84073,051OPERATIONAL HIGHLIGHTSThree months ended Year ended Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2017Dec. 31, 2016Tonnes milled454,897 437,601 1,974,0931,271,670Grade (g/t Au)11.8 7.5 9.87.9Recovery (%) 96.3% 93.6% 95.7%95.1%Gold produced (oz) 166,579 105,575 596,405313,653Gold sold (oz) 165,715 111,690 592,674326,687Production costs $68,283 $60,625$288,315 $192,842Averaged realizedprice ($/oz sold)1,282 1,202 1,2611,234Operating cash costsper ounce sold($/oz sold)412 533 481571AISC ($/oz sold) 816 900 812930Adjusted net earnings 71,15322,806 149,133 67,851Adjusted basic earningsper share 0.340.160.72 0.56
Production, sales and revenue
The company produced 596,405 ounces in 2017, an increase of 90 per cent from 2016 when consolidated production included the Australian operations from Nov. 30, 2016, and the St. Andrew assets from Jan. 26, 2016. The increase in production compared with 2016 largely reflected the full-year contribution of the company's Australian operations, which included production of 284,440 ounces in 2017 compared with 18,657 ounces in the final month of 2016. Production from the company's Canadian operations totalled 311,965 ounces, which compared with production of 295,838 ounces in 2016. Excluding the impact of the Holloway mine, which was placed on care and maintenance on Dec. 31, 2016, and produced 27,129 ounces in 2016 versus 287 ounces in 2017, production from the company's Canadian operations increased 16 per cent from the previous year. Production at Macassa of 194,237 ounces in 2017 increased 19,070 ounces or 11 per cent from the previous year, reflecting both a higher average grade and increased run-of-mine tonnes processed compared with 2016. Production from Holt increased 25 per cent to 66,677 ounces year over year, reflecting an 11-per-cent increase in tonnes processed. Production at Taylor totalled 50,764 ounces, an increase of 25 per cent from 2016, reflecting significantly higher tonnes processed during the year.
Gold sales in 2017 totalled 592,674 ounces, an 80-per-cent increase from 329,489 ounces in 2016. Higher gold sales were the primarily factor leading to an 85-per-cent increase in revenue for the year, to $747.5-million from $403.3-million in 2016. The main contributor to the increase in both gold sales and revenue was increased production related to the full-year contribution from the company's Australian operations in 2017. The realized gold price in 2017 averaged $1,261 per ounce, 3 per cent higher than the average price of $1,224 per ounce the previous year.
For the fourth quarter of 2017, consolidated production totalled 166,579 ounces, a 56-per-cent increase from the fourth quarter of 2016. The increase from the prior year mainly reflected a full quarter of results from the company's Australian operations, which compared with results from Nov. 30, 2016, to the end of the year in the fourth quarter of 2016 following completion of the Newmarket arrangement. For the fourth quarter of 2017, the Fosterville mine, being the only operating mine in Australia during the quarter, contributed 79,157 ounces, which compared with total production from the company's Australian operations of 18,657 ounces in the fourth quarter of 2016, including 13,196 ounces from Fosterville, 4,609 ounces from the Cosmo mine and 852 ounces from the Stawell mine. Production from Canadian operations in the fourth quarter of 2017 totalled 87,426 ounces, which compared with production of 87,952 ounces in the fourth quarter of 2016. Excluding production from the Holloway mine, which produced 9,825 ounces in the fourth quarter of 2016, but was placed on care and maintenance effective Dec. 31, 2016, production from the Canadian operations increased 12 per cent compared with the fourth quarter of 2016.
Fourth quarter 2017 production increased 27,490 ounces or 20 per cent from 139,091 ounces the previous quarter. Each of the company's operating mines increased production in the fourth quarter of 2017 compared with the third quarter of 2017. The largest increase was at Fosterville, where production rose 17,622 ounces or 29 per cent quarter over quarter, reflecting a significant increase in the average grade, to 21.5 grams per tonne. Production from the Canadian operations increased 11,160 ounces or 15 per cent from the previous quarter, reflecting both higher tonnes processed and average grades at the Holt and Taylor mines, and increased run-of-mine tonnes processed at Macassa.
Fourth quarter 2017 gold sales totalled 165,715 ounces, 48 per cent and 20 per cent higher than in the fourth quarter of 2016 and the third quarter of 2017, respectively. The realized gold price for the quarter averaged $1,282 per ounce, an increase of 7 per cent from $1,202 per ounce in the fourth quarter of 2016 and $1 increase from the previous quarter. Revenue for the fourth quarter of 2017 totalled $212.4-million, an $82.3-million or 63-per-cent increase from the fourth quarter of 2016 and $35.7-million or 20 per cent higher than in the third quarter of 2017.
Earnings from mine operations
Earnings from mine operations in 2017 totalled $289.1-million, more than double the $136.0-million from 2016. The increase in earnings from mine operations in 2017 reflected the significant revenue growth achieved on a year-over-year basis. Partially offsetting the impact of higher revenue were increased levels of production costs, depletion and depreciation expense, and royalty expense, with all three increases mainly related to growth in production, gold sales and revenue stemming from the addition of the company's Australian operation on Nov. 30, 2016. Production costs in 2017 totalled $288.3-million, which compared with $192.8-million in 2016. Depletion and depreciation expense rose to $148.7-million from $59.0-million in 2016. The increase in depletion and depreciation expense in 2017 was a result of the purchase price allocation exercise of assigning fair values to mining interest and plant and equipment acquired in the Newmarket arrangement on Nov. 30, 2016, which are being amortized over the life of mine and over the life of the underlying assets. Royalty expense in 2017 totalled $21.4-million compared with $15.6-million in 2016. The increase resulted from the addition of the company's Australian operations, which include a 2-per-cent net smelter return on all gold production at the Fosterville mine.
Earnings from mine operations in the fourth quarter of 2017 totalled $92.3-million, more than double the level of $41.6-million achieved in the fourth quarter of 2016 and 26 per cent higher than $73.4-million the previous quarter. The increase from both prior periods resulted from the solid growth in revenue, both on a year-over-year and quarter-over-quarter basis. Total production costs in the fourth quarter of 2017 were $68.3-million versus $60.6-million in the fourth quarter of 2016 and $66.5-million in the third quarter of 2017. Depletion and depreciation expense in the fourth quarter of 2017 totalled $45.6-million compared with $24.5-million in the fourth quarter of 2016 and $31.7-million the previous quarter. Royalty expense totalled $6.2-million in the fourth quarter of 2017 versus $4.2-million for the same period in 2016 and $5.1-million in the third quarter of 2017. The higher expenditure levels in the fourth quarter of 2017 reflected increased production and sales volumes during the quarter, with the inclusion of the company's Australian operations for the full quarter in the fourth quarter of 2017 versus only one month in the fourth quarter of 2016 mainly accounting for the increase compared with a year ago, and improved results at all four of the company's operating mines in the fourth quarter of 2017 accounting for the increases quarter over quarter.
Additional expenses
Exploration and evaluation expenditures in 2017 rose substantially from the previous year, increasing 206 per cent to $48.4-million from $15.8-million in 2016. The increase reflected the company's growing asset base, significant commitment to production growth at existing mines, as well as exploration success achieved as the year progressed. Exploration and evaluation expenditures in the fourth quarter of 2017 totalled $10.7-million, which compared with $6.0-million in the fourth quarter of 2016 and $16.9-million the previous quarter. Growth from the fourth quarter of 2016 mainly reflected the inclusion of the company's Australian operation for the full quarter in the fourth quarter of 2017, as well as the significant exploration activities continuing at and around both the Fosterville and Cosmo mines during the fourth quarter of 2017. The reduction from the previous quarter reflected the timing for completing exploration activities and incurring the related expenditures during 2017.
General and administrative expense (excluding share-based payments expense and transaction costs) totalled $21.7-million in 2017 and $6.1-million in the fourth quarter of 2017. General and administrative expense for these periods compared with $10.8-million and $2.6-million, respectively, in 2016 and the fourth quarter of 2016. High levels of general and administrative expense both on a full-year and fourth quarter basis compared with 2016, reflected growth in the company's business portfolio and the full-year contribution to revenue and costs of the Australian operations in 2017 compared with one month in 2016. General and administrative expense in the fourth quarter of 2017 was similar to the previous quarter's level of $5.9-million.
Share-based payment expense for 2017 of $3.9-million compared with $1.2-million in 2016. The increase was reflective of the granting of restricted-share units (RSUs) and performance-share units (PSUs) starting in the third quarter of 2016 and going forward. Share-based payment expense in the fourth quarter of 2017 totalled $700,000, which compared with $100,000 in the fourth quarter of 2016 and $1.0-million the previous quarter.
Transaction costs totalled $400,000 in 2017 and nil in the fourth quarter of 2017. In 2016, transaction costs totalled $17.7-million for the full year and $14.4-million for the fourth quarter. Most of the transaction costs in 2016 and the fourth quarter of 2016 related to the completion of the Newmarket arrangement on Nov. 30, 2016.
Care and maintenance expense related to the suspension of operations and placement on care and maintenance of the Stawell mine (as of Dec. 13, 2016), the Holloway mine (as of Dec. 31, 2016), and the Cosmo mine and Union Reefs mill (as of June 30, 2017). Care and maintenance expense in 2017 totalled $11.9-million versus $100,000 in 2016, with the increase largely related to the Cosmo mine and Union Reefs mill, where care and maintenance expense in 2017 totalled $9.6-million. In the fourth quarter of 2017, the company recorded a recovery on care and maintenance expense of $2.2-million, which compared with care and maintenance expense of $100,000 in the fourth quarter of 2016 and $4.9-million in the third quarter of 2017. The recovery in the fourth quarter of 2017 reflected the reclassification to discontinued operations of year-to-date and 2016 expenses for the Stawell mine following the sale of the mine on Dec. 21, 2017.
On Dec. 21, 2017, the company completed a transaction to sell to an affiliate of Arete Capital Partners Ltd. all the issued and outstanding common shares of its indirectly held wholly owned subsidiary, Stawell Gold Mines Pty. Ltd., which held the Stawell mine. Pursuant to the terms of the transaction, the company received $6.25-million in cash consideration upon closing and retains a 2.5-per-cent net smelter return royalty on the Stawell mine. The components of revenue and expense were separated from continuing operations following completion of the sale and are reported as discontinued operations, with a loss from discontinued operations of $24.9-million being included in the company's 2017 and the fourth quarter of 2017 financial results and a loss from discontinued operations of $4.6-million being included in the results for both 2016 and the fourth quarter of 2016.
Finance costs in 2017 totalled $12.2-million versus $11.7-million in 2016. Fourth quarter 2017 finance costs totalled $3.5-million compared with $3.1-million in the fourth quarter of 2016 and $2.4-million the previous quarter. Finance costs for each period relate to the various financial instruments held by the company. The increase from the previous quarter mainly related to the timing for incurring finance fees and bank charges. Convertible debenture interest for 2017 totalled $8.2-million, compared with $10.2-million for 2016. Finance income relates primarily to interest earned on excess cash held on account. The increase in finance income in 2017 to $2.1-million from $800,000 in 2016 resulted from the significant increase in cash during 2017 compared with the previous year. Finance income in the fourth quarter of 2017 totalled $500,000, which compared with $300,000 in the fourth quarter of 2016 and $400,000 in the third quarter of 2017.
The company's current income tax expense totalled $44.2-million for 2017 along with deferred income tax recovery of $5.5-million, for an effective tax rate of 19.8 per cent, which compared with current and deferred income tax expense of $2.8-million and $30.2-million, respectively, in 2016 for an effective tax rate of 42.5 per cent. The deferred tax recovery was was primarily due to the recognition of $40.5-million of previously unrecognized deferred tax assets in the period that were acquired in a previous business combination. These deferred tax assets are recognized as a result of a change in expected future profits to be realized after a reorganization of the acquired corporate structure. In addition, the company recognized a deferred tax asset recovery of $12.1-million related to the offset of current year income taxes.
For the fourth quarter of 2017, the current income tax expense totalled $13.8-million, while the company recorded deferred tax recovery of $24.9-million, mainly related to the previously unrecognized deferred tax assets in the period that were acquired in a previous business combination. In the fourth quarter of 2016, the company had current income tax recovery of $300,000 and deferred income tax expense of $10.3-million, while the third quarter of 2017 reported current and deferred income tax expense totalling $12.0-million and $8.3-million, respectively.
Other income in 2017 totalled $3.4-million compared with $200,000 in 2016, with the increase due to a higher amount of premiums recognized on the flow-through shares. For the fourth quarter of 2017, the company recorded other loss of $18.9-million, mainly reflecting a $17.6-million pretax, mark-to-market loss in the quarter on fair valuing the company's 14.0 million common share purchase warrants of Novo, which were acquired on Sept. 6, 2017. The other loss in the fourth quarter of 2017 compared with other income of $2.2-million in the fourth quarter of 2016 and other income of $21.3-million the previous quarter. The $21.3-million of other income in the third quarter of 2017 was the result of a $19.2-million pretax mark-to-market gain on fair valuing the company's 14.0 million Novo common share purchase warrants.
Unit cost performance
Operating cash costs per ounce sold for 2017 averaged $481, a 16-per-cent improvement from $571 in 2016 mainly reflecting a higher average mill grade in 2017 compared with the previous year (9.8 grams per tonne versus 7.9 grams per tonne in 2016). Contributing to the improved average grade in 2017 was a the full-year contribution from the Fosterville mine in Australia, where the average mill grade in 2017 was 15.8 grams per tonne, as well as improved grades at the Macassa, with an average mill grade of 15.2 grams per tonne in 2017 compared with 14.1 grams per tonne in 2016. Operating cash costs per ounce sold from the company's Australian operations averaged $376 per ounce sold in 2017, compared with $714 per ounce from Nov. 30, 2016, to the end of the year. Operating cash costs per ounce sold from Canadian operation averaged $576, which compared with $558 in 2016. The year-over-year increase for the Canadian operations reflected lower operating cash cost per ounce sold at both Taylor and Holt in 2016.
AISC per ounce sold averaged $812 in 2017, a 13-per-cent improvement from $930 in 2016 reflecting improved operating cash cost per ounce sold as well as lower levels of sustaining capital expenditures per ounce sold compared with the same period a year earlier. Sustaining capital expenditures in 2017 totalled $147.7-million ($249 per ounce sold), which compared with $86.6-million ($263 per ounce sold) in 2016. The full-year contribution of the company's Fosterville mine, where AISC per ounce sold averaged $491 in 2017, was the primary factor accounting for the year-over-year improvement. AISC per ounce sold for Canadian operations averaged $911 versus $900 in 2016.
For the fourth quarter of 2017, operating cash costs per ounce sold averaged $412, a 23-per-cent improvement from $533 in the fourth quarter of 2016 and 15 per cent better than $482 the previous quarter. Higher production, largely due to a significant increase in the average grade at Fosterville, to 21.5 grams per tonne, was a key factor contributing to the improvement fromboth prior periods. AISC per ounce sold for the fourth quarter of 2017 averaged $816, a 9-per-cent improvement from $900 in the fourth quarter of 2016 and 3 per cent better than $845 for the third quarter of 2017. The improvement from both prior periods resulted from lower operating cash cost per ounce sold, which more than offset an increase in sustaining capital expenditures per ounce sold. Sustaining capital expenditures in the fourth quarter of 2017 totalled $51.6-million ($312 per ounce sold) compared with $32.5-million ($291 per ounces) in the fourth quarter of 2016 and $38.3-million ($278 per ounces sold) in the third quarter of 2017. The increase in sustaining capital related to the company's Canadian operations and was largely due to the timing of sustaining capital expenditures at Macassa and Taylor to late in the year.
Net earnings of $157.3-million or 64 cents per share in 2017
Net earnings for 2017 totalled $132.3-million (64 cents per basic share), an increase of $90.3-million or 214 per cent from $42.1-million (35 cents per basic share) in 2016. Contributing to net earnings in 2017 were earnings from continuing operations of $157.3-million and a loss on from discontinued operations of $24.9-million related to the Stawell mine. In 2016, earnings from continuing operations totalled $46.7-million, while loss from discontinued operations totalled $4.6-million.
The increase in earnings from continuing operations in 2017 was largely the result of significantly higher revenue due mainly to the full-year contribution from the company's Fosterville mine in 2017 versus one month in 2016. Also contributing to the year-over-year increase was a lower effective tax rate in 2017, due largely to the recognition of deferred tax assets, as well as transaction costs totalling $17.7-million in 2016 related mainly to completion of the Newmarket arrangement on Nov. 30, 2016. Offsetting these favourable factors were higher production and depletion and depreciation costs, as well as increased exploration and general and administrative expenses. The increase in basic earnings per share in 2017 was not as significant as growth in net earnings due to a higher number of average shares outstanding, resulting mainly from the two acquisitions completed in 2016.
Adjusted net earnings from continuing operations in 2017 totalled $149.1-million (72 cents in adjusted net earnings per share from continuing operations), representing growth of $81.2-million or 120 per cent from $67.9-million in 2016. The exclusion from adjusted net earnings from continuing operations in 2017 of the $24.9-million after-tax loss from discontinued operations (12 cents per share) and net deferred tax recovery of $10.0-million (five cents per share) were the most significant differences between net earnings and adjusted net earnings from continuing operations for the year. In 2016, adjusted net earnings from continuing operations were higher than net earnings due to the exclusion of transaction costs, mainly related to the completion of the Newmarket arrangement, the impact of purchase price allocation adjustments on acquired metal inventory, and a loss from discontinued operations.
Net earnings in the fourth quarter of 2017 totalled $41.0-million (20 cents per basic share), which compared with net earnings of $3.1-million (two cents per basic share) in the fourth quarter of 2016. Included in net earnings in the fourth quarter of 2017 were earnings from continuing operations totalling $65.9-million and a loss from discontinued operations of $24.9-million related to the sale of the Stawell mine.
The increase in earnings from continuing operations in the fourth quarter of 2017 compared with the fourth quarter of 2016 reflected increased revenue and improved unit costs, mainly related to the full-quarter contribution from the Fosterville mine in the fourth quarter of 2017 versus one month in the fourth quarter of 2016. Also contributing to the increase from the fourth quarter of 2016 was a $24.9-million deferred tax recovery in the fourth quarter of 2017, mainly related to previously unrecognized deferred tax assets, as well as $14.4-million of transaction costs in the fourth quarter of 2016 related to completion of the Newmarket arrangement. Partially offsetting these favourable factors were higher production costs and depletion and depreciation expenses in the fourth quarter of 2017 versus the fourth quarter of 2016, as well as increased exploration and general and administrative expenditures. In addition, the fourth quarter of 2017 earnings from continuing operations included the $17.6-million pretax marked-to-market loss on fair valuing the company's 14.0 million common share purchase warrants of Novo.
Adjusted net earnings from continuing operations in the fourth quarter of 2017 totalled $71.2-million (34 cents in adjusted net earnings per share from continuing operations) versus $22.8-million in the fourth quarter of 2016 and $27.4-million in the third quarter of 2017. The difference between net earnings and adjusted net earnings from continuing operations in the fourth quarter of 2017 mainly related to the exclusion in adjusted net earnings from continuing operations of the $24.9-million after-tax loss on discontinued operations (12 cents per share), a $17.6-million pretax mark-to-market loss on the fair valuing the company's 14.0 million common share purchase warrants in Novo (eight cents per share) and net deferred tax recovery of $10.0-million (five cents per share). In the fourth quarter of 2016, a number of pretax expenses were excluded from adjusted net earnings from continuing operations, including: transaction costs of $14.4-million and $6.5-million of purchase price allocations adjustments on acquired metal inventory. In addition, adjusted net earnings from continuing operations in the fourth quarter of 2016 also excluded an after-tax $4.6-million loss from discontinued operations. In the third quarter of 2017, the company recorded a $19.2-million pretax mark-to-market gain related to the fair value of Novo warrants, which was excluded from adjusted net earnings from continuing operations.
The $41.0-million of net earnings in the fourth quarter of 2017 compared with net earnings of $43.8-million in the third quarter of 2017. The company's net earnings in the third quarter of 2017 were entirely related to continuing operations. Higher sales and improved unit costs contributed to the $22.4-million or 51-per-cent increase earnings from continuing operations quarter over quarter. Also having a significant impact on earnings from continuing operations for both quarters was the fair valuing of the company's Novo warrants, with the fourth quarter of 2017 earnings from continuing operations including the $17.6 pretax mark-to-market loss, while earnings from continuing operations in the third quarter of 2017 benefited from a $19.2-million pretax mark-to-market gain on the fair valuing of the warrants. In addition, the $24.9-million deferred tax recovery in the fourth quarter of 2017 also contributed to the increase in earnings from continuing operation compared with the previous quarter.
The adjusted net earnings in the fourth quarter of 2017 of $71.2-million increased 160 per cent from $27.4-million in the third quarter of 2017. The difference between net earnings and adjusted net earnings from continuing operations in the third quarter of 2017 mainly related to exclusion in adjusted net earnings from continuing operations of the $24.9-million after-tax loss on discontinued operations and the $19.2-million pretax marked-to-market gain on the fair valuing of the Novo warrants.
2017 cash flow from operating activities of $309.8-million, free cash flow totals $178.0-million
Cash at Dec. 31, 2017, totalled $231.6-million, which compared with cash of $234.9-million at Dec. 31, 2016, and cash of $210.5-million at Sept. 30, 2017. Cash flow from operating activities and free cash flow in 2017 totalled $309.8-million and $178.0-million, respectively, which compared with $187.0-million and $114.0-million, respectively, in 2016. The significant free cash flow generated by the company in 2017 was offset by the use of cash in a number of areas focused on value creation for the company's shareholders, including strategic investments, debt repayment and elimination, and share repurchases.
During 2017, the company made strategic investments in a number of junior exploration companies. In August and September, 2017, the company invested an aggregate of $61.0-million ($74.9-million (Canadian)) for the purchase of 25.8 million common shares and 14.0 million common share purchase warrants of Novo. In June, 2017, the company invested $6.9-million ($8.9-million (Canadian)) to acquire 17.9 million common shares of Bonterra Resources Inc., a TSX Venture Exchange-listed company with exploration projects in Quebec and Ontario. Through two transactions (in April and December, 2017), the company invested $6.7-million ($8.6-million (Canadian)) to acquire 12.3 million common shares and 975,500 common share purchase warrants of Metanor Resources Inc., a TSX Venture Exchange-listed company with assets in the Urban-Barry district of Northern Quebec. In November, 2017, the company invested $3.8-million ($4.9-million (Canadian)) to acquire 33.3 common shares and 33.3 options to acquire common shares of De Grey Mining Ltd., an Australian Securities Exchange-listed company with assets based in Western Australia.
A total of $44.0-million ($57.2-million (Canadian)) of cash was used to redeem and eliminate the company's two series of convertible debentures during 2017. On June 30, 2017, the company paid $43.8-million ($56.8-million (Canadian)) to redeem the 6 per cent debentures (with an additional $1.3-million ($1.7-million (Canadian)) paid for interest accrued at the maturity date of June 30, 2017). In December, 2017, over 99 per cent of the $62.0-million 7.5 per cent debentures, which matured on Dec. 31, 2017, were converted into common shares at a conversion price of $13.70 (Canadian) per share, being a conversion rate of 72.9927 common shares for each $1,000 in principal held. As a result, an aggregate of 4,505,393 common shares were issued to the debenture holders. The company paid an aggregate amount of $200,000 ($300,000 (Canadian)) in cash with respect to the outstanding 7.5 per cent debentures not converted at their maturity. In addition, $2.2-million ($2.8-million (Canadian)) of cash was paid to all holders of the 7.5 per cent debentures with respect to interest accrued at the maturity date of Dec. 31, 2017.
During 2017, the company repurchased 5,443,400 common shares for cancellation under the NCIB program introduced in May, 2017. The common shares were repurchased at an average price of $11.05 ($14.06 (Canadian)) per common share for total cash payment of $60.1-million ($76.5-million (Canadian)). Under the NCIB, a maximum of 15,186,571 Kirkland Lake Gold common shares can be purchased for cancellation. Accordingly, the company may purchase an additional 9,743,171 common shares for cancellation through the NCIB until the program's expiry in May, 2018.
Performance against 2017 guidance
Kirkland Lake Gold achieved all of the company's consolidated production and unit cost guidance for full-year 2017. A number of revisions were made to the company's guidance during the year. Guidance for consolidated production and AISC per ounce sold were improved three times. Consolidated production guidance began the year at 500,000 to 525,000 ounces and was ultimately improved to 580,000 to 595,000 ounces on Nov. 2, 2017. AISC per ounce sold guidance commenced 2017 at $950 to $1,000 with the final improvement resulting in a target range of $800 to $825. Other revisions to consolidated guidance during 2017 included: two improvements to operating cash cost per ounce sold guidance, which began the year at $625 to $675 and was ultimately established at $475 to $500 on Nov. 2, 2017; a revision to sustaining and growth capital expenditure guidance from $180-million to $200-million to $160-million to $180-million on Aug. 2, 2017, and an increase in the guidance for corporate G&A (general and administrative) expense from $17-million to $20-million on Nov. 2, 2017. (For more information on the revisions to guidance announced on Nov. 2, 2017, Aug. 2, 2017, and May 4, 2017, see the management's discussion and analysis for the periods ended Sept. 30, 2017, June 30, 2017, and March 31, 2017.)
2017 GUIDANCE (1)(as at Nov. 2, 2017)($ millions unless otherwise stated) Canadian minesAustralian minesMacassa Taylor HoltFostervilleNorthern Territory (3) ConsolidatedGold production (koz) 190-19550-5565-70250-26020580-595Op. cash costs/ouncesold ($/oz) (2) (5) $520-$550$575-$625$670-$725$260-$280 $1,500-$1,600$475-$500AISC/ounce sold($/oz) (2) (5)$800-$825Operating cash costs (2)$270-$280Royalty costs $20-$25Sustaining and growthcapital (5) $160-$180Exploration and evaluation$45-$55Corporate G&A expense (4) $20 (1) Represents the company's guidance for which the three-month period ended Dec. 31, 2017, was measured against.(2) Operating cash costs, operating cash cost/ounce sold and AISC/ounce sold reflect an average U.S.-dollar-to-Canadian-dollar exchange rate of 1.2983 and a U.S.-dollar-to-Australian-dollar exchange rate of 1.3047. See non-IFRS (international financial reporting standards) measures set out starting on page 37 of the company's MD&A for the year and three months ended Dec. 31, 2017, for further details. The most comparable IFRS measure for operating cash costs, operating cash costs per ounce sold and AISC per ounce sold is production costs as presented in the consolidated statements of operations and comprehensive income.(3) Northern Territory includes Cosmo mine and Union Reefs mill. The Cosmo mine was placed on care and maintenance effective June 30, 2017 (see news release dated May 4, 2017).(4) Includes general and administrative costs and severance payments. Excludes non-cash share-based payment expense.(5) Non-IFRS -- the definition and reconciliation of these non-IFRS measures are included starting on page 37 of the company's MD&A for the year and three months ended Dec. 31, 2017. 2017 PERFORMANCE ($ millions unless otherwise stated) Canadian minesAustralian minesMacassaTaylor HoltFosterville Northern Territory (3)Consolidated (2)Gold production (oz) 194,23750,764 66,677263,845 20,595 596,405 Op. cash cost/ounce sold ($/oz) (1) (4) $523$610 $685 $264 $1,661$481AISC/ounce sold ($/oz) (1) (4) $812Operating cash costs (1) $285.3Royalty costs $21.4 Sustaining and growth capital (4) $164.5Exploration and evaluation$48.4 Corporate G&A expense (5) $21.7 (1) Operating cash costs, operating cash costs/ounce and AISC/ounce sold reflect an average U.S.-dollar-to-Canadian-dollar exchange rate of 1.2965 and a U.S.-dollar-to-Australian-dollar exchange rate of 1.3041.(2) Consolidated 2017 production includes 287 ounces processed from the Holloway mine.(3) Northern Territory includes Cosmo mine and Union Reefs mill. The Cosmo mine was placed on care and maintenance effective June 30, 2017 (see news release dated May 4, 2017).(4) Non-IFRS -- the definition and reconciliation of these non-IFRS measures are included starting on page 37 of the company's MD&A for the year and three months ended Dec. 31, 2017.(5) Includes general and administrative costs and severance payments. Excludes non-cash share-based payment expense.
Key highlights of 2017 performance compared to guidance:
Consolidated gold production for 2017 of 596,405 ounces exceeded the company's improved guidance for the year of 580,000 to 595,000 ounces. All of the company's operating mines achieved or exceeded their respective production guidance. The primary factor driving the strong consolidated production performance and multiple increases in guidance was the performance at Fosterville, where grades outperformed expected levels for much of the year, including during the fourth quarter of 2017 when the mine achieved its highest-ever quarterly average grade of 21.5 grams per tonne. Fosterville's production guidance was increased twice during 2017 from 140,000 to 160,000 ounces initially to a final target of 250,000 to 260,000 ounces. Fosterville's total production of 263,845 ounces exceeded the improved guidance. Macassa's production of 194,237 ounces achieved the top end of the improved guidance range of 190,000 to 195,000 ounces. Production guidance for Macassa was increased on May 4, 2017, from 180,000 to 185,000 ounces on the anticipation higher run-of-mine tonnage over the balance of the year. Both run-of-mine tonnes processed and average grades at Macassa increased from comparable 2016 levels. Guidance for the Holt mine of 65,000 to 70,000 ounces remained unchanged throughout 2017, with the mine's production of 66,677 ounces achieving the target range. Production at the Taylor mine of 50,764 ounces achieved the revised target range of 50,000 to 55,000 ounces, which had been revised from 55,000 to 60,000 ounces on Aug. 2, 2017.Production costs for the year totalled $288.3-million. Operating cash costs of $285.3-million in 2017 exceeded the guidance range of $270-milloin to $280-million due mainly to the higher-than-expected production volumes during the year.Operating cash costs per ounce sold for 2017 averaged $481, in the low end of the improved guidance range of $475 to $500. Operating cash costs at Fosterville averaged $264 per ounce sold, achieving guidance of $260 to $280, which had been improved on Aug. 2, 2017, from $310 to $300. Higher-than-expected grades were the main factor contributing to Fosterville's low unit operating cash costs during the year. Macassa's operating cash costs of $523 per ounce sold were in the low end of the improved target range of $520 to $550, which had been revised from $552 to $568 per ounce sold on May 4, 2018, in anticipation of higher production volumes over the balance of the year. Holt's operating cash cost per ounce sold of $685 was near the low end of the guidance established at the beginning of 2017, while average operating cash costs at Taylor of $610 per ounce sold achieved the mine's guidance of $575 to $625. Operating cash cost guidance for Taylor had been revised higher from $450 to $525 on Nov. 2, 2017, reflecting the impact of lower-than-expected production volumes during the year.AISC per ounce sold averaged $812 for 2017, in line with the improved guidance of $800 to $825. In addition to a solid operating cash cost performance, discussed above, the company's strong AISC performance also reflected lower-than-anticipated levels of sustaining capital expenditures on a per-ounce-sold basis.Royalty costs totalled $21.4-million for 2017, which was in the low end of the company's full-year 2017 guidance of $20-million to$25-million.Sustaining and growth capital expenditures for 2017 totalled $164.5-million, which was in line compared with the company's revised guidance of $160-million to $180-million. Sustaining capital expenditures for the year totalled $147.7-million, with growth capital expenditures totalling $16.8-million. The revision of the company's guidance on Aug. 2, 2018, from $180-million to$200-million largely reflected lower-than-expected levels of capital development, primarily at Macassa and Holt, due to revisions to mine sequencing plans and, in some cases, the deferral of development work.Exploration expenditures totalled $48.4-million, consistent with the company's full-year 2017 guidance of $45-million to $55-million.Corporate G&A expense for 2017 totalled $21.7-million, which compared with revised guidance of $20.0-million. The higher than expected corporate G&A expense was mainly due to additional consulting and legal fees related to initiatives undertaken during the year.
2017 and the fourth quarter of 2017 financial results and conference call details
A conference call to discuss the results will be held by senior management on Wednesday, Feb. 21, 2018, at 2 p.m. Eastern Time. The call will be webcast and accessible on the company's website.
Date: Wednesday, Feb. 21, 2018
Conference ID: 8274437
Time: 2 p.m. Eastern Time
Toll-free number: 1-866-393-4306
International callers: 1-734-385-2616
Qualified persons
Pierre Rocque, PEng, vice-president, Canadian operations, and Ian Holland, FAusIMM, vice-president, Australian operations, are qualified persons as defined in National Instrument 43-101 and have reviewed and approved disclosure of the technical information and data in this news release.
About Kirkland Lake Gold Ltd.
Kirkland Lake Gold is a mid-tier gold producer with 2018 production targeted at over 620,000 ounces of gold from mines in Canada and Australia. The production profile of the company is anchored from two high-grade, low-cost operations, including the Macassa mine located in Northeastern Ontario and the Fosterville mine located in the state of Victoria, Australia. Kirkland Lake Gold's solid base of quality assets is complemented by district-scale exploration potential, supported by a strong financial position with extensive management and operational expertise.
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